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Market Sentiments

Date: Wednesday, 17th October 2007

Time: Around 10:30 AM

I logged into my trading account to view my portfolio. Couldn’t believe what I saw! My portfolio (though it’s meager) was down 20% from what it was last night. I looked at the market flash only to know that the trading had been halted for an hour as the Sensex shed around 1500 points within minutes of opening, thereby ripping through the lower circuit. I was not able to figure out what was going on.

Anyway all that passed away like a dream and things were back to normal the very same day, once the markets reopened.

But why the hell did this happen?

Well by now everyone knows that it was because of SEBI’s proposed ban on P Notes with immediate effect. I interacted with people around me who had some interest in the markets, and everyone suggested to stay away from active investing as the markets are volatile because of SEBI’s recent proposal on P Notes.

So far so good, the moment I asked what a P Note is, I got blank faces or some weird explanation which I couldn’t comprehend.

To be precise, a P Note (Participatory Note) is a financial instrument through which a foreign individual or institution can take a position in the Indian equity market without being registered as a ‘Foreign Institutional Investor’ (FII). So the FIIs who are already registered in India become the medium for such individuals/institutions to take a pie in India’s promising growth story by issuing them P Notes.

So what’s wrong?

Well if the money flowing in through such instruments becomes significant; it can make any regulator uncomfortable, as it becomes impossible to track as to where the money is coming from. I am not going to explain any further. If you would like you know more the following could be helpful:

What are P Notes?

The point I want to make is not the whole P Note issue. I wanted to highlight the significance of the all powerful ‘Market Sentiment’. I have read a number of times that the Market Sentiment is so powerful that it can sometimes defy all logic. I believe that in any market there are only a few people (few in nos. but holding the major chunk of the market.) who understand the intricacies of it and a majority are mere dummy observers.

Let me summarize what I learnt from the P Note episode:

  1. Any news reaches the market as and when it happens.
  2. The markets react to the news almost instantly.
  3. We may be able to predict the direction (+ve or -ve) of the index based on the news but the magnitude of swing can be completely disproportional to the actual impact the news may have.
  4. Over the time, the markets digest the news and indexes get back to their normal, leaving behind the appropriate impact the news should have made.

All this provides some decent opportunities for a well informed investor, to buy/sell stocks and make a quick gain.

Happy investing 🙂